MUMBAI, Feb 5 (Reuters) - The Indian rupee strengthened to
its highest closing level in three-and-a-half months on Tuesday,
helped by foreign inflows ahead of the government stake sale in
state-run power producer NPTC, although weak domestic shares and
demand for the greenback from oil importers limited gains.

The government is looking to raise about $2 billion through
a stake sale this week in NTPC Ltd as part of efforts
to raise funds towards meeting its fiscal deficit target.
Dealers expect foreign fund inflows between $300 million and
$500 million for the transaction.

Other stake sales before the fiscal year ends in March
include state trading company MMTC Ltd and steelmaker
Steel Authority of India Ltd.

Still, gains in the rupee in the near term could be
constrained by caution ahead of the federal budget for 2013/14
this month. India needs to commit to its recent reform measures
and meet its fiscal deficit targets, Fitch Ratings said on
Monday.

"Foreign funds are bringing in dollars for investing in
NTPC. We are seeing inflows on account of front running of the
NTPC offer," said Anil Kumar Bhansali, vice-president at Mecklai
Financials.

The partially convertible rupee closed at
53.135/145 per dollar, its strongest closing level since Oct.
17, and versus its previous close of 53.285/295, after moving in
a 53.07 to 53.42 range during the day.

The rupee's gains were constrained after domestic shares
fell for a fifth session out of the past six, while dealers also
cited dollar demand from oil importers.

In the coming days, adverse global sentiment and dollar
demand in the domestic market could also weigh, said traders,
keeping the rupee in a 52.80 to 53.50 per dollar range this
week.

"The inflows would aid, but the rupee would also depend on
the global sentiment," a senior trader with a foreign bank said.

In the offshore non-deliverable forwards, the
one-month contract was at 53.49, while the three-month was at
54.06.

In the currency futures market, the most-traded
near-month dollar/rupee contracts on the National Stock
Exchange, the MCX-SX and the United Stock Exchange all closed at
about 53.35 with a total traded volume of $5.25 billion.
(Editing by Anand Basu)